Ctrip: 15% growth expected next year, outbound travel and overseas markets are the driving forces.

Summary of Ctrip's 2023Q3 Performance Meeting, please see the "Violent Recovery, How Far Can Ctrip Go?" for the earnings report analysis.

1. Management Remarks

Hotel bookings increased by 97% YoY, while flight bookings increased by 70% YoY.

Domestic hotels: Long-distance hotel bookings increased by 133% YoY, while short-distance bookings increased by 66%.

Outbound travel: In 23Q3, domestic outbound travel recovered to around 50% of pre-pandemic levels, with Ctrip's outbound flight and hotel bookings reaching 80% of 2019 levels, outperforming the market by 30 percentage points. APAC, Hong Kong, Macau, Thailand, Singapore, South Korea, Japan, and other destinations remain popular due to high flight capacity and convenient visa applications. Europe has seen rapid MoM growth. More overseas partners are preparing to welcome Chinese tourists. Over 15 popular destinations such as Dubai, Paris, and Kuala Lumpur offer customized services such as Chinese language support and payment options.

International: International OTA flight bookings increased by 80% YoY compared to 2019. Overall hotel bookings on the international OTA platform are more than double that of 2019. The international OTA platform currently accounts for about half of the overseas business volume.

The company has developed a comprehensive roadmap to significantly increase market share in key regions such as APAC, Hong Kong, South Korea, and Southeast Asia, benefiting from the one-stop shopping service provided by its strong product offerings. In the future, the same strategic approach will be used to expand into other global markets using product and service capabilities.

Accommodation: Accommodation products balance the advantages of long-distance and newly developed short-distance businesses. Partners can join the TripPLUS program to establish connections with high-quality loyal customers through Ctrip's brand membership. The company is also increasing its user base through penetration into lower-tier cities.

AI: The application of AI in the travel industry can improve efficiency and provide personalized solutions. The company has launched AI initiatives to reshape the travel market and improve the travel booking experience. Since the beginning of this year, the conversion rate of orders has doubled. AI chatbots help improve sales and service rates by accurately handling the increased demand using text and voice.

Share buyback and dividends: The rapid growth of the business this year has significantly strengthened the group's cash flow. The company believes that its stock price is undervalued. From September 2023 to the date of this announcement, the company has repurchased approximately 3.6 million American depositary shares under its existing stock repurchase plan, with a total consideration of approximately $120 million, reducing the number of shares by 0.5% compared to last year. The company's board of directors recently approved a regular capital return policy, starting from 2024, demonstrating the company's commitment to shareholders and confidence in future tourism and business development.

Q&A

Q: What are the differences between AI applications on international platforms and local platforms?

A: The AI strategy is consistent across the entire market, focusing on improving productivity and efficiency in marketing, engineering, and customer service. Through natural language interfaces and feasible suggestions, the aim is to help users plan their trips more effectively. Successful practices in each market will be shared and promoted among other markets, eventually becoming global standards within the organization.

Q: What are the Q4 and 2024 outlooks?

A: In Q4, the company's growth continued to outpace the industry average. Domestic hotel bookings exceeded 60% of the 2019 level, while outbound hotel and flight bookings recovered to around 80% of the 2019 level. Global OTA platforms maintained triple-digit growth in 2019. Market growth next year will face pressure, but the company is confident in achieving faster growth than the industry. With further recovery in outbound flight capacity and stable growth in domestic business, strong growth is expected in the outbound tourism business. For the global market, it is expected that the global OTA platform Trip.com will maintain high-speed growth, while Skyscanner and other overseas brands, despite recent obstacles in EMEA, will continue to grow healthily.

Q: Why is the recovery of outbound air travel slower than market expectations? When is a full recovery expected?

A: The company's outbound demand has already exceeded the 2019 level, but there are two main obstacles to the supply. The first is that visa application processes in certain regions, such as Europe and the United States, take longer. Improvement in visa applications is expected after the APAC conference. The second obstacle is flight capacity, which has only recovered to 60% of the outbound level. Outbound travel is expected to recover better next year.

Q: Have there been any observations of consumer downgrading?

A: There is currently no evidence of consumer downgrading in the leisure travel market. Both new and existing users on the company's platform continue to spend more than the 2019 level, and business travelers' spending has also increased compared to 2019. There is long-term confidence in the demand for Chinese tourism, with continuous growth in infrastructure such as airports, railways, and road networks. In terms of demand, as disposable income increases and consumption shifts from goods to services and experiences, leisure travel spending is transitioning from cyclical to more long-term. OTAs benefit from the increase in online penetration. Although business travel is affected by the economy, the company also sees opportunities, with more companies purchasing corporate travel management for cost control.

Q: What are the plans for sales expenses? Competition from Douyin?

A: Marketing efficiency has improved this year, mainly due to improvements in conversion and cross-selling. Sales expenses in Q4 will be adjusted in proportion to revenue. In the long term, the company will adhere to an ROI-driven marketing strategy and explore opportunities in overseas and lower-tier cities in China. Currently, the competition in the domestic tourism market is relatively stable, with some seasonal fluctuations in marketing intensity among participants. Content platforms, due to their content attributes, are more conducive to promoting products. However, most content platforms lack a very powerful backend system to complete the booking process, while the core capability of OTAs lies first in the supply chain and, more importantly, in the standardized supply chain. The company will further enhance its competitiveness.

Q: Reasons for the increase in profit margin? Comparison of domestic, outbound, pure overseas profit margins with 2019? Profit structure in 2024?

A: Due to its high brand awareness and high market share in both domestic and outbound markets, the company enjoys a considerable profit margin. The overseas business is growing rapidly but is still in the investment phase. The company will balance investment and a healthy margin level. In 2024, the proportion of outbound revenue will increase, as outbound business traditionally has a higher margin. The profit margin is high this year partly because the demand in the first half of the year exceeded the company's expectations and the marketing investment was slightly lower. Therefore, the operating profit margin is higher than the normal level. Next year, more investment will be made in services and marketing, so the profit margin in the first half of next year will be lower than this year. However, the increase in the proportion of outbound business will also have leverage and help improve the overall profit margin next year. The long-term margin target is 20% to 30%.

Q: Long-term drivers of business growth and growth rate expectations? Reasons for the increase in gross profit margin?

A: The long-term drivers of growth are, first, the long-term GDP growth rate is between 4% and 5%, and the growth rate of tourism is higher than that of GDP, with a year-on-year growth rate of 8% to 10%. By shifting more offline business to online, the company's growth rate is higher than the growth rate of tourism, and the company's growth rate target is about 3 to 4 times that of GDP. During the three years of the pandemic, the company's technology team has made many improvements and is able to cope with the surge in demand. The company's profit margin could actually be higher, but in order to achieve long-term growth, continuous investment will be made in technology and services. Therefore, the long-term margin will be maintained between 20% and 30%.

Q: The proportion of Trip.com's revenue and its targets for the next 3 to 5 years? Growth strategy?

A: In Q3, Trip.com accounted for 6% of the revenue, and its revenue contribution has been steadily approaching Skyscanner. It is expected to surpass Skyscanner in the near future. In the next 3 to 4 years, Trip.com will maintain double-digit growth. In terms of total bookings, the Asia-Pacific region is the largest market, with a total scale exceeding mainland China. Trip.com has established a solid foothold in this region and has a well-established local operation. Trip.com is confident in expanding its influence through its integrated mobile application, competitive products, and high-quality services. In Europe, the main focus is currently on the air ticket market. In terms of total bookings, the scale of the European aviation market is about twice that of China, providing important synergistic opportunities between different brands. The company is also expanding into other countries and regions' markets while maintaining ROI standards.

Q: Growth strategy for OTA market share?

A: Different regions have different strategies. In the domestic market, the company aims to penetrate further into lower-tier cities by providing products with many incentives in terms of service and price, while serving high-tier city users with improved service quality and innovative products. In the outbound market, as visa and flight services recover, more users will travel abroad. In terms of overseas markets, the outbound supply chain can also serve overseas customers. In different market segments, we will seek different opportunities. Our focus is on product, technology, and service, continuously upgrading to meet the new needs of users.

Q: What is the medium to long-term outlook for the balance sheet? Share repurchase, dividend, and acquisition plans?

A: The board of directors approved multiple stock repurchase plans several years ago, which have not yet expired. Before this repurchase, there is still approximately $505 million in unused funds. The rapid growth of our business this year has significantly improved our cash flow, ensuring sufficient funds for repurchases without affecting normal operations. The recent stock price volatility caused by external factors has led to generally undervalued valuations, making it an appropriate time for repurchases.

Q: What is the reason for the increase in the R&D expense ratio? What are the future expectations?

A: The increase in R&D expenses is mainly due to the increase in personnel-related costs, with the number of R&D personnel significantly lower than in 2019, mainly due to increased performance bonuses, and the absolute value will decrease in Q4.

Q: What is the profitability of Trip.com?

A: Trip.com has achieved marginal breakeven in all markets, after deducting fixed costs and group apportioned costs. Asian Trip.com is expected to achieve breakeven at the net profit level within 2-3 years, while other markets will continue to focus on growth, but there will be continuous improvement in the coming years.

Q: What are the driving factors for improving profit margins?

A: In the long term, it is mainly through operating leverage and improving the revenue mix. In the long run, AI may be one of the key drivers for continuously improving the operational efficiency of service centers. In the long term, the company is confident in achieving profit margins comparable to international peers.

Q: What are the costs and revenues related to AI?

A: AI is applied in four aspects. The first is to enhance user interaction, with Trip Genie helping users find suitable products. The second is to improve the efficiency of the technical team. The third is to streamline content production, ensuring that content and recommendation lists are based on reliable data. The fourth is to enhance the efficiency of user services.

Q: Is it better to repurchase US dollar assets or invest?

A: The company has always been in the tourism industry, and investors invest in Trip.com not because Trip.com is good at investing, but because it is good at the tourism industry. The company should continue to focus on its core business, invest in tourism, and bring better returns to shareholders.